In this article, you will learn how to get started in Forex trading. Here you can learn how to choose a broker, set up a trading account, fund the trading account, how to use the funds, and other useful things when starting to trade Forex.
Having a regulated broker
When learning how to
trade Forex, the first step is to have a secure trading environment. Protecting
your investment in the stock market starts with choosing the right broker!
Trading in the financial
markets is a regulated activity in most countries around the world and it is
certainly a regulated activity in the world's financial centers such as the UK,
USA, EU, Japan, Australia, Canada, and a few others. Regulated activity means
that there is appropriate legislation and dedicated governmental or
semi-governmental institutions that license and regulate financial brokers.
These institutions will be your recourse if you ever have a dispute with your
online broker.
If the broker has no
license, you are protected only by the terms of the contract they offer, which
is often random.
The online brokerage
world is unfortunately full of unscrupulous people and for the same company
name, there can sometimes be several companies. When opening a trading account,
make sure that you are working with a regulated broker who is licensed, unless
the opposite is your goal.
Otherwise, there are
many trading account providers to choose from. Each one can match you to some
unique criteria.
Brokers according to their performance
After selecting a
broker, it's important to understand which order execution model the broker
uses. A market maker, as opposed to a simple access provider, is a type of
broker that creates a market for its clients by displaying actual price quotes
but does not place orders in the interbank market. In this case, the broker is
the client's counterparty: he wins when the client loses and he loses when the
client wins. As your broker represents the market, he is the market maker.
No Dealing Desk
brokers are also called ECN brokers and they simply work as access providers
for their clients in the interbank market. This type of account allows for more
market depth, have floating spreads, and longer order execution time. When an
order is placed in an ECN account, the ECN broker processes it and forwards it
to the market. This way, instead of trading with your broker, you trade with one
of the millions of traders present in the interbank market.
For many traders, a
market maker broker is not a good thing and they prefer to work with an ECN
broker. But is a Dealing Desk broker a bad thing?
A short answer - if
the broker has a license issued by a serious financial authority, like the FCA
in the UK or the AMF in France - you can trust your broker. You can be sure
that the broker does not manipulate prices or charts. Also, you can trust that
the funds are in segregated accounts and that you will be protected if your
broker goes bankrupt.
Another thing that is
very interesting in trading is the speed of order execution. When the broker is
a Dealing Desk broker, the order is sent to the broker and the execution takes
place immediately. So, if the speed of order execution is essential to your
trading strategy, having a Dealing Desk broker may be an alternative to
consider.
The Forex Trading Account
Now that you have
chosen a broker, we come to step two: choosing and opening your online trading
account.
A trading account is
similar to your current account, with one important difference - you can use
the funds in your trading account to profit from the financial market. In this
example, you can use funds to start trading Forex online.
Trading accounts come
in a wide variety and most forex brokers offer several types of accounts at the
same time.
The things to watch
out for depending on your trading strategy and trading plan. Account types vary
in their minimum deposit, the leverage offered financial instruments available,
and other trading specifics.
Micro accounts allow
you to trade with as little as 10 Euros using very small volumes, such as 0.01
or a micro-lot. This type of account sometimes allows leverage of up to 1:1000,
which allows the trader to make very large gains or losses. The list of financial
instruments on these accounts is usually limited to 20-30 of the most popular
currency pairs.
Brokers also offer a
"standard" account. This type of account allows you to start trading
on Forex and CFDs, metals, futures. In other words, the majority of instruments
available with the broker will be available on the standard account. The
initial deposit on this account is likely to be a bit larger, starting from
$100 to $200. The leverage is lower and the spreads are around 1-2 pips on the
major currency pairs.
Sometimes brokers
offer account types specially designed for very active traders, with lower
spreads and with a higher minimum deposit, like 1000 euros and the leverage is
very often lower, around 1:100 or even lower.
Sometimes brokers have
VIP accounts with additional features. Deposit bonuses, no-swap, or no-spread
accounts are offered to attract more affluent clients.
No matter what type of
trading account you choose, make sure you understand the contracts and
information related to margin trading.
Forex Leverage
If you want to learn
about how to learn trading and trading-related topics on the forums, you will
come across the question of whether leverage is a good or bad thing for the
trader. It is important to know that the most important leverage on the types
of investments is the one offered by the forex brokers. When using leverage,
the line between good use and abuse is very fine.
It is important to
understand how leverage works. Leverage does not change the number of points in
the market, but it can change how much you will gain or lose on a trade. It all
has to do with the size of the order.
It is true that with
higher leverage you can trade larger order sizes. Overall, opening positions
with a larger order size or opening multiple orders will result in higher
margin requirements and higher pip values. Trading CFDs in excess is quite
dangerous, as the trading account balance moves faster and the trading account
cannot cope with the volatility of the market.
This is a textbook
example of how not to trade online. If we keep the same trading account with
low order sizes and good menu management and low leverage, the same negative
scenario can occur. Too little leverage generates margin calls, even if the
account is well-capitalized. Like the result, your account can suffer losses if
the volatility is higher.
Equity in the trading account
First of all, you
should never trade with funds that you cannot afford to lose. Starting Online
Trading is similar to any other investment in the stock market and it is a
risky business and only funds that you can afford to lose should be used.
Trading with funds that one can afford to bet in the stock market helps the
trader not to be stressed in his trading and allows him to approach this
investment activity more calmly.
Most beginner traders
are careful with their initial deposits and fund their trading accounts once
they get a taste for online trading. This usually means two things: they have
lost the initial deposit and they want to recoup the investment with new
deposits, adopting a chit or double strategy. Sooner or later this strategy
inevitably leads to disaster. In trading, excessive risk-taking pays off sooner
or later.
Statistically, you
have a 99% chance of losing your initial deposit if you go into trading without
any trading strategy and any training in online trading. Not all orders are
winners and the experience of taking losses is also a learning experience.
Loss is the price to
pay for learning if you are motivated to spend the time to learn. The market is
not your enemy. Your broker is not your enemy either. The most important thing
in your trading is yourself!
The real question is:
What have you learned from making a costly trading mistake and are you prepared
to never repeat it? As simple as that.
